Top UK Stocks to Watch: IAG shares drop after lacklustre ramp-up

IAG’s capacity is recovering slower than expected, NatWest restores payouts and launches a buyback as the economic outlook improves, Rightmove sees growth surpass pre-pandemic levels, and Babcock shares plunge after sinking deeper into the red.

UK

Top News: IAG ramp-up disappoints but expected to improve going forward

International Consolidated Airlines Group, better known as IAG, revealed it operated at significantly lower capacity than expected in the first half as the pandemic continues to weigh on demand.

IAG, which owns a string of airlines including British Airways, Aer Lingus and Iberia, said capacity was equal to just 21.9% of pre-pandemic levels in the second quarter. That was way below the 25% guided by the company and only a minor improvement from 19.6% reported in the first quarter.

IAG shares were down 3.8% in early trade this morning at 175.7p.

IAG said capacity will ramp-up to around 45% of pre-pandemic levels in the third and fourth quarters of 2021, but warned this still remains highly uncertain due to the ever-changing rules for travellers.

As a result, revenue was down over 58% in the first half to EUR2.21 billion from EUR5.28 billion the year before, leading IAG to a loss after tax of EUR2.04 billion. That loss narrowed from the EUR3.81 billion loss booked the year before and was slightly better than the EUR2.15 billion loss forecast by analysts.

IAG said it ended June with EUR10.2 billion in liquidity and said cash operating costs in the second quarter rose from the first to around EUR190 million per week. It said it saw a significant improvement in cashflow in the second quarter compared to the first.

‘In the short term, our focus is on ensuring our operational readiness, so we have the flexibility to capitalise on an environment where there's evidence of widespread pent-up demand when travel restrictions are lifted,’ said chief executive Luis Gallego. ‘This is reflected in Iberia's and Vueling's results. They were the best performers within the group in the second quarter reflecting stronger Latin American and Spanish domestic markets driven by fewer travel restrictions. We know that recovery will be uneven, but we're ready to take advantage of a surge in air travel demand in line with increasing vaccination rates.’

IAG also welcomed the news out of the UK that double-jabbed travellers entering England from amber list countries will no longer have to quarantine, potentially opening up travel to and from the US and the EU, describing it as ‘an important first step in fully re-opening the transatlantic travel corridor’.

NatWest restores dividends and launches buyback as economy improves

NatWest restored shareholder payouts and launched a new share buyback programme this morning as the economic picture continues to improve, allowing it to release reserves and deliver better than expected profits.

Its operating profit before tax of £2.50 billion swung from the £770 million loss booked the year before. The bottom-line attributable profit of £1.84 billion compared to a £705 million loss the year before, and was ahead of the £1.29 billion expected by analysts. Earnings were boosted by the release of £707 million of reserves set aside for potentially bad loans as the economic outlook improves.

The bank’s net interest margin remained broadly flat quarter-on-quarter in the period at 1.61%, in line with what markets expected.

NatWest announced an interim dividend of 3.0 pence per share and a new share buyback programme worth £750 million that will be completed before the end of the year. It also said that it has raised the minimum amount it will return to shareholders on an annual basis to £1 billion, meaning investors will receive a minimum windfall of £2.9 billion in 2021.

The returns have been announced as NatWest reported an CET1 ratio – a measure of a bank’s financial strength – of 18.2%, comfortably above minimum requirements.  

NatWest said net lending increased in the first half and that customer deposits continued to build as people look to save more money and reduce spending. Income from the UK and RBSI fell 3.3% year-on-year as businesses conducted fewer transactions and because of the lower yield curve.

NatWest shares were down 0.5% in early trade this morning at 204.2p.

The results cap-off a solid week for UK-listed banks. Lloyds Banking Group, regarded as NatWest’s closest peer, reintroduced a progressive dividend policy and raised its guidance when it reported results earlier this week. Meanwhile, Barclays also reinstated a progressive payout and supplemented it with a new £500 million share buyback to build on the £700 million buyback in April. HSBC will follow with second-quarter results on Monday.

Rightmove growth continues to be fuelled by high house demand

Rightmove said revenue and earnings grew past pre-pandemic levels in the first six months of 2021 as demand for property remains high, allowing it to report record revenue per advertiser.

The online property portal said revenue rose to £149.9 million from £94.8 million the year before, which offered weak comparatives from when demand was hit by the pandemic. Notably, revenue was also 4% ahead of pre-pandemic levels and came in slightly ahead of the £148.5 million forecast by analysts.

Operating profit grew 86% to £114.9 million and came in 6% above pre-pandemic levels. Earnings per share of 10.8 pence jumped from 5.7p and also surpassed pre-pandemic levels to beat the 10.3p expected.

The company reported its highest ever average revenue per advertiser in the period, up 63% year-on-year to £1,163 per month. That is some 11% higher than the average reported before the pandemic hit. Rightmove said this was partly offset by the drop in demand for marketing of new houses because of the sky-high demand at present.

Rightmove shares were down 1.8% in early trade this morning at 666.1p.

Overall membership numbers remained broadly flat since the start of 2021 at 19,116. Still, Rightmove said 90% of the time people are spending on property portals are spending on it Rightmove.

‘The first half of 2021 has delivered healthy ARPA growth, record low Agency churn and product innovation for both customers and home-hunters.  Strong growth in Agency ARPA - up 11% vs H1 2019 - has been driven by our range of digital solutions enabling agents to compete effectively for new listings in the busy market.  The buoyant New Homes market has temporarily softened New Homes ARPA, by 1% relative to H1 2019,’ said the company.  

‘We expect the second half of the year to follow a broadly similar pattern, with good ARPA growth led by ongoing adoption of Optimiser 2020, broadly stable Agency branches and continued growth in our other businesses and the increased demand for properties continuing to impact the availability of New Homes development numbers,’ Rightmove added.

Rightmove said it is paying an interim dividend of 3.0 pence. No dividend was paid last year as it looked to hoard cash amid the coronavirus crisis, but the payout is higher than the 2.8p dividend paid for the first half of 2019. It also plans to continue its share buyback programme in the second half after reinstating it earlier this year.

Babcock sinks deeper into the red following sweeping review

Babcock International said it sank much deeper into the red during its last financial year after booking significant charges following its review of contract profitability and its balance sheet, as it outlined a new plan for the business and told investors it won’t need to raise equity.

Babcock shares plunged 8.5% in early trade this morning at 278.5p.

The company said revenue in the year to the end of March fell to £4.18 billion from £4.42 billion the year before. Its operating loss ballooned to £1.64 billion from just £75.6 million the year before and the loss per share followed to 337.0 pence from the 23.3p loss a year earlier.

Those hefty losses were primarily caused by the review, which resulted in Babcock significantly slashing the estimated value of several contracts. It said it recorded £1.81 billion worth of changes in the year as a whole.

Still, even once those charges were stripped out, its underlying operating profit fell to £222.4 million from £377.6 million and, in reality, that too was hit by £250 million worth of adjustments.

‘We have now completed the series of reviews announced in January. These have reinforced our confidence in the underlying strength of the Babcock business and at the same time helped identify the necessary strategic changes to improve our performance. We have a plan in place to strengthen the group without the need for an equity issue,’ said chief executive David Lockwood.

‘Looking forward, Babcock will be a simplified and more focussed group with a renewed emphasis on the exceptional engineering skills of its people. We will be well placed to take advantage of the many opportunities we see in both UK and international markets, leading to improved cash generation and profitability in the medium term,’ Lockwood added.

Babcock said it intends to focus on aerospace, defence and security going forward. This will see it offload ‘at least’ £400 million worth of assets over the next year and deliver £40 million worth of annualised cost savings, with around £20 million being delivered in the new financial year.

Any proceeds are likely to be used to reduce debt. Net debt is currently equal to around 2.5 times annual Ebitda but Babcock wants to get that down to below 2.0 times. It is still way below the temporary limit it has agreed with banks of 4.5 times.

Babcock said the aim of its plan is to improve profitability and, more importantly, cash generation. Operating cashflow increased to £470.8 million in the year from £445.3 million the year before, while free cashflow surged to £169.5 million from only £55.5 million beforehand.

The company said the new financial year will be one of ‘transition’ and warned that the pandemic still poses a threat. Plus, whilst the review should not impact cashflows going forward there are other major headwinds that could constrain it going forward, including restructuring costs, additional pension conditions and IT upgrades. This will mean it will be free cashflow negative this year unless it can make enough asset disposals to offset that spending.

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